Are Lululemon Short Sellers Buying Calls to Limit Upside Risk?

Heavily shorted LULU is drawing notable pre-earnings call volume.

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Speculators are feeling optimistic toward Lululemon Athletica (NASDAQ:LULU), judging by a recent preference for call options on the maker of yoga apparel. During the past 10 sessions, traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 11,238 calls on LULU, easily outnumbering the 7,886 puts that have been purchased.

The stock's 10-day ISE/CBOE/PHLX call/put volume ratio of 1.43 ranks higher than 88% of other such readings taken over the past year. This suggests options traders have rarely purchased calls over puts on LULU at a faster pace.

As call volume has accelerated on LULU, short sellers have been hitting the bricks. Short interest on the shares fell by nearly 12% during the past two reporting periods, though these pessimistic plays still account for a substantial 17.5% of the equity's float.

In fact, with Lululemon Athletica recently breaking out above resistance in the $78 neighborhood, it's possible that short sellers are buying calls in order to limit their upside risk. The $78 level had kept a tight lid on LULU's progress since last September, but the stock finally rose above this barrier in early May. Since then, this former technical ceiling has emerged as a tentative layer of support, and the stock is currently trading at $77.91.

Looking ahead, LULU is set to report its first-quarter earnings after the market closes on Monday, June 10. In its past four quarterly reports, the company has surpassed analysts' bottom-line estimates every time -- one more reason why the remaining LULU shorts might be looking to hedge their bets.